United States: Trouble Keeping Track Of Automobile-Related Expenses? There's An App For That

If you provide your employees with company-owned or
company-leased vehicles, you know that it is not always easy for
your employees to keep track of all of their automobile-related
expenses.

To meet Internal Revenue Service (IRS) requirements, employees
generally must substantiate the business use of a company-provided
vehicle. This means that they must carefully and accurately
document where they went, when, for what purpose, and how many
miles they drove to get there. This not only can become tedious and
burdensome for employees, but also often results in inaccurate
records when employees try to come up with complete and detailed
records at the end of each tax year. This could be problematic in
that the benefit may not qualify for exclusion as a working
condition fringe benefit and, consequently, could be taxable in
part or in full to the employee.

Fortunately, there may be an easier way to keep track of
automobile-related expenses. Mileage tracker apps, such as Mileage
Expense Log, TripLog, and MileIQ, may be an easy and efficient way
to meet many of the IRS's requirements. Mileage trackers are
easily accessible, as they can simply be downloaded on
employees' cell phones, and they automatically track, record,
and calculate the mileage for each trip that an employee takes.
Many of these trackers include additional features, such as the
ability to track tolls, parking, and meals, or the option to swipe
left or right for personal versus business trips.

Substantiation Is Not Always Required

The Five-Part Exception—No Personal Use
Policy

There is an exception to the general rule that requires
substantiation. Employees are exempt from substantiating the
business use of company-owned or company-leased vehicles if they
can meet the following requirements:

The vehicle is owned or leased by the employer and provided
solely for business reasons.

When not being used, the vehicle is stored on the
employer's business premises.

No employee using the vehicle lives at the employer's
business premises.

The employer has a written policy prohibiting personal use of
the vehicle.

Neither the employee nor anyone associated with the employee
used the vehicle for any personal purpose.

However, if any of the above requirements are not met, then the
employer may have to include the fair market value of the vehicle
(plus fuel if paid by the employer) as taxable wages on the
employee's Form W-2.

The No Personal Use other than Commuting Rule

In the event the above "no personal use" rule does not
apply to the particular employer's business, there is an
alternative. While not quite an exception, one of the valuation
rules essentially provides a way around the general substantiation
rule.

Specifically, the "no personal use other than
commuting" rule permits an employer to determine the value of
a vehicle it provides to an employee for commuting use by
multiplying each one-way commute (from home to work or from work to
home) by $1.50, as opposed to including the fair market value of
the vehicle on the employee's Form W-2. If more than one
employee commutes in the vehicle, this value applies to each
employee. The three-dollars-per-workday amount must be included in
the employee's wages, unless it is reimbursed by the
employee.

An employer may rely on the "no personal use other than
commuting" rule if the following requirements are met:

The company provides the vehicle for use in its trade or
business and, for bona fide noncompensatory business reasons, the
company requires the employee to commute in the vehicle.

The company has a written policy prohibiting the use of the
vehicle for personal purposes other than for commuting or de
minimis personal use.

The employee does not use the vehicle for personal purposes
other than commuting and de minimis personal use (e.g., stopping at
the dry cleaners on the way to or from work).

The employer does not apply this rule to "control
employees," who are defined as:

a board- or shareholder-appointed, confirmed, or elected
officer whose pay is $105,000 or more;

a director;

an employee whose pay is $215,000 (indexed annually) or more;
or

an employee who owns a one percent or more equity, capital, or
profits interest in the business.

The employee logs how many days he or she drove the
vehicle.

Although the commuting rule may be the most stringent of the
valuation rules, it provides the easiest method of determining the
amount of income includible in employee wages. If the employer
wishes to implement the commuting rule, it may still be
advantageous for employees to rely on mileage tracker apps in order
to effectively log how many days they drove the vehicle each
year.

Other Valuation Rules

The General Valuation Rule

If an employee must substantiate the business use of a
company-provided vehicle, the general rule for determining the
value of personal use to be taxed as wages is to multiply the fair
market value of the vehicle by the employee's personal use
percentage. The fair market value is the amount that an individual
would have to pay in an arm's-length transaction to lease the
same or a comparable vehicle under the same or comparable
conditions in the geographic area where the vehicle is available
for use. If an employee fails to substantiate business use, then
the personal use percentage is 100 percent.

Two special valuation rules are more favorable to employees and
employers but still require employees to substantiate the business
use of the vehicle. These are the annual lease valuation and
cents-per-mile rules.

Annual Lease Valuation

Under the annual lease valuation rule, the fair market value of
an employee's personal use of a company-provided vehicle is
determined by multiplying the annual lease value of the vehicle by
the percentage of personal miles driven. To determine the annual
lease value, the employer first determines the vehicle's fair
market value, and that value is used to find the corresponding
lease value in a table in the IRS regulations.

Employers can use mileage records to determine the portion of
the total automobile use attributable to personal use. Valuations
under the annual lease valuation rule include the value of
maintenance and insurance but do not include fuel provided by the
employer. The annual lease valuation rule offers two safe
harbors:

If the vehicle is owned by the employer, the employer's
cost of purchasing the vehicle can be used as the fair market
value, provided the purchase was arm's length.

If the vehicle was leased by the employer, the vehicle's
fair market value can be either the manufacturer's suggested
retail price, less eight percent, or the value reported by a
nationally recognized pricing source that regularly reports new or
used vehicle retail values.

The annual lease value is easier to calculate and more
employer-friendly than the general valuation rule and could be a
beneficial alternative for employers, provided the employer meets
the requirements to use it.

Cents per Mile

Under the cents-per-mile rule, the fair market value of an
employee's personal use of a company-provided vehicle is
determined by multiplying the IRS's business standard mileage
rate by the number of personal miles driven. The business standard
mileage rate in 2017 is 53.5 cents per mile (indexed annually).

However, because use of the standard mileage rate as a valuation
tool for company-provided vehicles is greatly restricted, this
method is used less frequently than the annual lease valuation
method. To use the cents-per-mile method:

the employer must expect the employee to regularly use the
vehicle while conducting the employer's business, or the
vehicle must be driven at least 10,000 miles annually (including
personal use);

the vehicle must be used primarily by employees;

the vehicle's value when it is placed into service must not
exceed a certain amount (for 2017, $15,900 for cars and $17,800 for
trucks/vans, indexed annually); and

the employee must substantiate the business use of the
vehicle.

Regarding the first requirement above, a vehicle is considered
to be regularly used in the employer's business if either at
least 50 percent of the vehicle's total annual mileage is
business-related or the company sponsors a commuting pool that uses
the vehicle each workday to drive at least 3 employees to and from
work.

Valuations under the cents-per-mile rule include the value of
maintenance and insurance.

Although the annual lease valuation rule and cents-per-mile
rules are more employer- and employee-friendly than the general
valuation rule, they are limited by consistency requirements. The
employer must use the same method starting on the first day the
vehicle is available to an employee for personal use. If an
employer uses one of these methods, no change to a different
valuation method is permitted in subsequent years (other than a
change to the commuting valuation rule). A change from the
cents-per-mile rule is permitted, but only if the vehicle no longer
meets the requirements for this method.

Nonetheless, because employees must substantiate the business
use of the company-provided vehicle under each of these methods,
they may still benefit from cell phone mileage tracker apps.

Exception From Federal Income Tax Withholding

If any amount must be included in an employee's taxable
wages because of his or her personal use of an employer-provided
vehicle (or failure to substantiate business use), his or her
employer is generally required to withhold federal income taxes and
the employee's share of Social Security and Medicare taxes.

However, an employer need not withhold federal income taxes if
it: (1) notifies the employee by January 31 of each year or within
30 days after the employee first gets the vehicle (whichever is
later), that no federal income taxes will be withheld for vehicle
benefits; and (2) includes the value of the benefit on an original
filed Form W-2. Note that the employer's option not to withhold
federal income tax does not extend to the employee's share of
Social Security and Medicare taxes.

Conclusion

A company car may be an attractive fringe benefit, provided that
all the complexities relating to the personal use of the vehicle
are addressed. Employers may want to review all of their options
carefully when providing vehicles to employees.

Employers may also want to consider suggesting or requiring that
their employees utilize cell phone mileage tracker apps to simplify
the mileage and expense tracking process and ensure that they are
not taxed unfairly on their business use of a company-provided
vehicle.

A version of this article first appeared in
Employer's Guide to Fringe Benefit Rules.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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